JAL Stock Aims to Fly Again

By Kana Inagaki

Reuters

Less than three years after Japan Airlines Co. entered bankruptcy in what was the country’s biggest ever nonfinancial failure, the carrier is preparing for the world’s second-biggest initial public offering this year.

But will investors buy the $8.5 billion of stock on offer?

Unlike this year’s $16 billion Facebook IPO, where large fund managers were the biggest buyers, domestic retail investors are expected to be allocated the most stock and therefore hold the key to its success.

The problem is those small individual shareholders are still haunted by the wipeout in stock value after JAL filed for bankruptcy protection with a debt load of ¥2.32 trillion ($30 billion at current exchange rates) in January 2010. Large institutional investors such as banks also remain bitter after they lost ¥521.5 billion on JAL’s debt.

Added to this are concerns over the tough outlook across the global aviation industry as well as the increased competition caused by the arrival of low-cost carriers in Japan.

JAL’s relisting is set for Sept. 19 at an indicative price of ¥3,790 per share, which values the offering at ¥663.3 billion.

All the shares are being sold by a government-owned fund that injected ¥350 billion into the carrier in 2010. Three-fourths of the shares are to be allocated to Japanese investors and the rest to overseas buyers.

The appeal to all investors is the cheap valuation; shares are priced at about five times projected earnings, less than half All Nippon Airways Co.’s near 12-times valuation.

Another attraction for individual buyers is that they get discounts of 50% off some ticket prices if they hold on to the stock for three years in a row, in addition to those given for six months of ownership. Airline stocks in Japan have traditionally been popular with individuals for such discounts, typically provided for domestic flights.

A JAL spokesman said it would be the first time the company offers such benefits for longer-term ownership.

Around 75% of the domestic offering will be placed with retail investors, two people who are involved with JAL’s IPO said. Retail investors held around 60% of all shares before the airline’s bankruptcy filing.

“Unlike JAL in the old days, I believe the company will continue to be managed in a solid and sound manner. I hope retail investors will become JAL shareholders,” Honorary Chairman Kazuo Inamori, the architect of JAL’s turnaround, said last week.

JAL lightning-fast recovery has been seen in its earnings, helped by cuts in workforce, flights and operating costs as well as tax exemptions stretching years into the future. Its operating-profit margin stood at 17% for the fiscal year that ended March 31, as much as three times that of rivals world-wide.

However, there are lingering concerns over whether JAL can maintain its competitiveness over the longer term, as the tax breaks expire and amid rising fuel costs and competition with other Asian carriers in the region.

“The low pricing and the shareholder benefits will be attractive for individual investors,” said Yoshihiro Okumura, general manager at Chibagin Asset Management Co. “Still, investors are not optimistic about the medium to long-term prospects. It’s not an easy business that can be turned around so quickly.”

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